Roth IRA Distributions

 A normal Roth IRA distribution occurs after the actual date you attain age 59½ and your Roth account has been in effect for five calendar years (measured differently than age 59½). All distributions under this scenario are tax free.

For example, William was born on February 15, 1954. He will be 59½ on August 15, 2013. A distribution before that date, including earnings, would be called premature (see below). The Roth account, in this example, also had to have been in effect since 2008. William could have opened an account as late as April 15, 2009, and make a timely Roth IRA contribution for the 2008 calendar year; that time period then would be considered five years.

A premature Roth IRA distribution, without an exception, occurs when you remove earnings before age 59½, whether or not the account has been opened for five years and none of the statutory exceptions apply (see next Q&A), so that a 10% penalty is assessed against any earnings withdrawn (no penalty if you are over age 59½), in addition to any taxes due on those earnings. If the account has been in existence for five years and you are age 59 ½ or older, all earnings are tax free.

Roth IRA account values that were converted from a traditional IRA (amounts that were taxable at the time of the conversion) will have the 10% penalty reattach if they are withdrawn before the earlier of five years or age 59½. Five years includes the year the traditional IRA account was converted to a Roth IRA. For example, a traditional IRA account converted to a Roth IRA on December 10, 2012, will have its five-year holding period expire at the end of 2016. The 10% penalty does not otherwise apply to taxable amounts converted from a traditional IRA to a Roth IRA at the time of the conversion. (See Roth Conversion Resource Center). 

 A premature Roth IRA distribution with an exception occurs (but with no 10% penalty on the earnings or amounts that were taxable when a Roth conversion occurred) when any taxable portion of the Roth IRA is withdrawn under any of the following circumstances:

Practice Tip
Unless the participant is using Roth dollars that were converted from a traditional IRA, it is unlikely that any taxable dollars would be withdrawn under this option, as the ordering rules on Roth IRA withdrawals is basis first (the money the individual contributed), conversion dollars, and then earnings.

Practice Tip
The $10,000 withdrawal for first-time homebuyers from a Roth IRA is a tax-free distribution if the account has been in existence for five years. In addition, the participant can withdraw his or her non-taxable basis at any  time and for any reason, so the $10,000 limit only comes into play when earnings (dollars above basis) are being withdrawn or the withdrawal consists of dollars that were taxable when converted to a Roth IRA from a traditional IRA and five years have not yet passed.

• Substantially, equal periodic payments are taken based on your life expectancy of the recipient. (This is often the 72(t) distribution option because of the section of the Internal Revenue Code, where the penalty and exception reside.) Payments must be made for the greater of five years or the attainment of age 59½ or the 10% penalty reattaches (retroactively) to any taxable portion of all distributions made before age 59½. Unless you are using Roth dollars that were converted from a traditional IRA, it is unlikely that any taxable dollars would be withdrawn under this option as the ordering rules on Roth IRA withdrawals is basis first (the money you contributed), conversion dollars, and then earnings.
• You are disabled.
• You are the beneficiary of a deceased Roth IRA owner.
• You use distributions to pay qualified higher education expenses (e.g., tuition, fees, books, supplies, etc.) for yourself or a family member such as a son or daughter.
• You are paying health insurance premiums after you have received unemployment compensation for more than 12 weeks.
• You have significant, unreimbursed medical expenses (greater than 10% of AGI¹) for that year. Individuals 65 and over can use the lower 7.5% threshold through 2016.
• You used the distribution to buy, build, or rebuild a first home. (There is a lifetime limit of $10,000 for distributions for first-time homebuyers, so if you wanted to assist two children equally to buy a home, each child could receive $5,000. If your spouse also had an IRA, he/she could also do the same for each child in this example.)   The $10,000 withdrawal for first-time homebuyers from a Roth IRA is a tax-free distribution if the account has been in existence for five years. In addition, you can withdraw your non-taxable basis at any time and for any reason, so the $10,000 limit only comes into play when earnings (dollars above basis) are being withdrawn or the withdrawal consists of dollars that were taxable when converted to a Roth IRA from a traditional IRA and five years have not yet passed.
• Your distribution is due to an IRS levy to pay overdue taxes.

¹ Adjusted Gross Income includes wages, interest, capital gains, income from retirement accounts and alimony paid to the taxpayer adjusted downward by specific deductions (including contributions to deductible retirement accounts and alimony paid by the taxpayer); but not including standard and itemized deductions.

Unlike a traditional IRA's required minimum distributions (RMDs), these do not apply to Roth IRA accounts until the account is inherited by a non-spouse beneficiary. (See "Death Benefits" below.) If a spouse inherits the account, there is no RMD necessary.

Contributory Roth IRAs are funded with aftertax dollars called "basis." When a withdrawal is made from a Roth IRA, it is always basis first. If you contributed $25,000 to a Roth IRA that was worth $50,000, the first $25,000 withdrawn would be considered return of basis and not subject to tax. This withdrawal may occur at any time.

Similarly, all amounts rolled over to a Roth IRA from a designated Roth 401(k) or Roth 403(b) account after you were a participant in the Roth 401(k) or Roth 403(b) for five years and age 59½ are considered basis, even though the Roth IRA may have been recently opened or opened to accommodate the rollover. Once the Roth IRA account has been established for five years, then all earnings on the amounts rolled over are tax free. If the Roth IRA account already existed for five years at the time of the rollover, then all earnings on the amounts rolled over are tax free from the start.

Amounts rolled over from a designated Roth 401(k) or Roth 403(b) account before you were a participant in the designated Roth 401(k) or Roth 403(b) for five years and age 59½ are considered basis to the extent you contributed aftertax dollars to the designated Roth 401(k) or Roth 403(b) account. You need to wait until you are age 59½ and the Roth IRA account receiving the funds has been in existence for five years for all the earnings from the designated Roth 401(k) account or designated 403(b) account to be tax free. If the Roth IRA account already existed for five years at the time of the rollover, then all earnings imbedded in the amounts rolled over from the designated Roth 401(k) account or designated Roth 403(b) account are tax free once age 59½ is attained.

When a Roth IRA account owner dies, generally an inherited IRA (called a "decedent" or "beneficial Roth IRA") is created. However, the treatment of the inherited Roth IRA account varies depending on who is the beneficiary. Roth IRAs that are inherited from a spouse are treated differently than Roth IRAs that are inherited from someone other than a spouse.

Inherited from spouse:

If the Roth IRA is inherited from someone other than a spouse, the options are more limited. The beneficiary may leave the account where it is or make a trustee-to-trustee transfer (to change investment vehicle from one Roth IRA trustee [custodian] directly to another) as long as the Roth IRA is established in the name of the deceased owner for the benefit of the beneficiary. For example the account might be titled as follows: "Joe Doe, deceased, Roth IRA, F/B/O Jane Doe, beneficiary."

If you are a non-spouse beneficiary, you have the option to:

A Stretch IRA is for investors who will not need their IRA money during their own retirement. While the law does not restrict which taxpayers can select the Stretch IRA option, the stretch strategy is appropriate only for those individuals who simply need and plan to receive the required minimum withdrawals, taken at the latest time the law allows, without penalty, age 70½.

A Stretch IRA (applies to Roth and traditional IRAs) can be described as a distribution strategy for an individual IRA's beneficiary. The objective upon the account owner's death is to S-T-R-E-T-C-H the beneficiary's payments over a lengthy period of time in order to obtain favorable economic and tax results. Payment projections over 30 years or more are not uncommon. The beneficiary is usually a child or a grandchild of the account owner, but may be anyone the owner chooses. There can be no guarantee, however, that the second- and third-generation beneficiaries will continue the stretch strategy and may elect to liquidate the account at any time.

Important Tip
Withdrawals from Roth IRAs are basis first (see above). If the minimum amount under the Stretch Roth IRA option is withdrawn each year, including any years before the account has been in existence for at least five years, it is unlikely that any withdrawals will be taxable.

Someone may want to S-T-R-E-T-C-H their distributions because money in a Roth IRA grows tax-deferred¹ and potentially tax free. The beneficiary effectively inherits a tax-deferred,¹ potentially tax free, savings account. By spreading the payments over a significant number of years tax deferred, potentially tax free, compounding continues, and if the account has been in existence for five years when a withdrawal is made, including the time the original owner held the account, all payments are tax free.

The regulations prohibit death distributions to extend beyond the period of the initial non-spouse beneficiary's life expectancy, not recalculated as they age.

Example: Martha dies and her daughter Angela is the beneficiary of her Roth IRA. Angela is 50 years old and her life expectancy is 34 years. In other words, Angela would need to withdraw 1/34, 1/33, 1/32, etc., of the account beginning on or before December 31st of the year following Martha's death.

If Angela dies five years later at age 55 and Angela's beneficiary is her son Bob, Bob can continue taking distributions based on Angela's reduced life expectancy (34-5= 29). If Bob were to pass away before the 29 years were over, he could pass on the Roth IRA to his beneficiary until the original life expectancy of Angela goes down to one, when the remaining balance would be fully distributed.

Unless restricted by the terms of the beneficiary designation, Angela, and subsequently Bob in this example, could accelerate their payments (take more than the minimum) which could lower the ultimate amount and length of the distributions. In addition, if this withdrawal period was less than five years from the time the Roth IRA was established, including the time the original account owner held the account, then any earnings accumulated on the account could be taxable if basis was exhausted.

If Martha did not name a beneficiary, the Roth IRA assets may have passed on to her estate with accelerated distributions being required. Some custodial account agreements may establish a beneficiary ordering rule, such as spouse, children, parents, etc., which could determine the actual beneficiary in the event the account owner did not have a named beneficiary upon death.  Lord Abbett Roth IRAs designate the estate as beneficiary if one is unnamed at the time of death.

It is also important to note that Roth IRAs cannot be transferred via your will unless the will had been named, prior to death, as the beneficiary or contingent beneficiary of the account and accepted by the custodian.

¹ Income whose taxes can be postponed until a later date; examples include IRAs and 401(k) plan earnings.

Risks Involving the Stretch IRA Strategy
Withdrawals by you or beneficiaries in excess of the required minimum distribution (RMD) will exhaust the account at a faster pace, reducing or eliminating the effectiveness of the stretch strategy. Distributions greater than the RMD could subject the payments to higher federal and possibly state income taxes. When investing assets, which will be used to stretch IRA payments, the investor must be cognizant of any front-end or back-end sales charges that can reduce the assets available. During an extended period of declining investment returns, investors will experience income fluctuations that may cause additional withdrawals to be made that will exhaust the account at a more rapid rate. There can be no guarantee that a Stretch IRA strategy will be advantageous to your specific situation, and many of its benefits are based on current tax laws, which are subject to change. If these laws change, an investor's ability to maintain estimated distributions may be affected. Lengthy distribution periods, much like those involved in a Stretch IRA, expose an investor to significant market risk.

Once in a 12-month period, measured from the date you first access your Roth IRA funds, you may withdraw an amount from each of your Roth IRAs, use it for whatever reason, and return it within 60 days as though the withdrawal never occurred.

Example: Barbara withdraws $30,000 from her Roth IRA on March 1, 2012. If she returns the $30,000, or a lesser amount, by April 30, 2012, she has had use of the money, preserved whatever basis is attached to the 2withdrawal, and avoided any taxes or penalties on any amounts exceeding her basis. She cannot make another withdrawal, with the ability to return it, until March 2, 2013.

Important Tip
Individuals must recognize there can be significant taxes and penalties if the funds are not repaid, and larger withdrawals may be more difficult to repay.

If Barbara had another Roth IRA (or several), she could make this 60-day withdrawal from each of them, at different times, use the funds as she wishes, and return them within the 60-day period.

Withdrawing funds from one Roth IRA and repaying it to another Roth IRA connects the second Roth IRA to the first Roth IRA for purposes of the 60-day rule. If Barbara had two Roth IRAs and withdrew from one, but repaid the other on a timely basis, she would lose the ability to make a separate 60-day withdrawal/return from the second IRA until March 2, 2013, in this example.

Lord Abbett will waive (or otherwise pay) the yearly $10.00 custodial fee that would be charged each year on an ongoing basis to every new IRA account and, therefore, will not assess a custodial account fee effective in 2013 or any year afterward. Fund level fees and expenses are still applicable.  Please see the current prospectus.